much more than what investors imagine it to be and higher than the $30 billion owned by qualified foreign institutional investors.

Ha Jiming, Chief Economist at China International Capital Corp., believes hot money might favor the industrial sector and move into the real estate industry in particular.

"At present, real estate developers are feeling the pinch of a shortage of capital supply, but the property investment growth rate is still running high, which is a very noticeable phenomenon," he said in a report published on the company's website.

Pressing the economy

Zhang Ming said judging from historical experience, the fast inflow of hot money could easily create capital bubbles and threaten macro-economic stability. Under the current conditions of a stringent money supply policy, the continuous influx of hot money has increased the money supply and placed enormous pressure on the Chinese Government to ease inflation.

Zhao Qingming, Director of the Research Department at China Construction Bank Co. Ltd., said increasing amounts of hot money could force the central bank to distribute more money in the market and trap the central bank into hedge problems.

At present, greater pressure is coming from concerns over sudden hot money pullouts. If this happens, the whole economy will suffer and a serious money crisis might ensue, he said.

Zhang Ming argues that if the U.S. economy picks up steam and the dollar regains its strength, China could see sudden outflows of hot money.

Supervision dilemma

Although relevant government departments have moved quickly to determine the source and locations of hot money, they will have a hard time supervising its movement.

Zhang Ming said government departments should work together to prevent hot money from entering the country through trade channels. In terms of foreign trade, the country's customs records goods entering or leaving China, while SAFE records the movement of capital flowing into and out of the country. Zhang said the two departments should exchange data frequently to monitor transaction behavior and determine whether trade order sheets are completed in real terms and if prices for goods are valid.

As for FDI, Zhang said SAFE should cooperate with the Ministry of Commerce and commercial banks. The Ministry of Commerce administers FDI contracts, while SAFE oversees FDI capital coming into China. Commercial banks are responsible for issuing the capital to factories or stock markets. If the three cooperated more closely, the government would have a better idea of how much foreign capital is actually in the country, Zhang said.

Zhang also proposed that the government make more concerted efforts to eliminate underground money exchangers, conduct stricter investigations of them, and closely supervise commercial banks that are likely to provide the same services as underground money exchangers. More importantly, Zhang said the government should maintain a reasonable renminbi appreciation speed, so as to reduce hot money's speculative nature in the mainland markets.